To recover, economies must first reckon with the coronavirus’ longer-term impact

24 Aprile 2020
  • Even with the market gyrations in the short term, investors could look further ahead to pick out bargains
  • Hong Kong, with huge reserves and a strong currency, is set to weather the storm. Yet, the government favours politics over economics, inhibiting recovery
We have never seen its like, nor are we likely to see it again. Hundreds of brightly painted tails representing hundreds of billions of dollars sitting idly in airfields around the world. And, with an aircraft; if you don’t use it, you lose it.
Scenes of empty streets, hospitals full of the suffering, doctors pleading for better protective equipment, and American rightists  aggressively campaigning to go back to work could not be imagined on the first of the year.
Scenes that can’t be pictured are the oceans of oil piling up on land and in seaborne tanker around the world, such that buyers are being paid to take it away. If I could fill up my bath, I would … though my wife would rightly object, as crude oil is messy and smelly.
First negative interest rates and now negative oil prices what is happening to economics? And we used to think prices would only fall to zero.
The oil price collapse, which would be so important at another time, is just a sideshow; relegated to a mere sub-narrative, like so many other important events. The “proper price” for later deliveries has been pulled down substantially by the battles in the short-term maturities (oil’s reference price is based on futures, not spot).
It will take a great deal for these prices to be driven up to levels that the oil-producing nations need to balance their books. Ironically, oil users can’t really benefit economically as their storage is full and there is no demand anyway.
This column warned of a global recession in January and that is now the accepted narrative. However, GDP figures do not truly reflect how very perilous the economic situation will turn out to be. The “stay at home” order has disrupted and revolutionised how people work; many will not return to an office.
Many will not return to a job. Those that do will have fewer workmates, they will have to clear the rust off everything from car brakes to airliners, not to mention their work processes. Many will maintain social distancing through necessity or habit, further delaying the pace of recovery.
Gross domestic product figures go on the scoreboard as annual figures. If in 2021 we see some recovery, global growth might be back to around 2 per cent. Investors may then mistakenly believe that “2021 was OK, 2019 was OK, so let’s ignore 2020”.
It may look as if things are back to normal – but they won’t be; we will be living in a very different economic world, having lost a lot of absolute growth.
That logic is why investors are “looking across the valley”. The big falls in March took US market indices back three years and other markets back seven to 10 years. Prices have recovered strongly since, on the back of the big bazookas fired by authorities around the world that have pledged to put as much as US$10 trillion – according to a Bloomberg report – into the global markets.
By way of reference, the market size of the MSCI World Index of 49 markets is about US$35 trillion – and that’s where, together with real estate, a lot of this extra liquidity is going to go.

In the short term, the market has to come to terms with the massive damage done to companies, people and economies. Big brand names are already going bust – most are already likely candidates for the chop but some will be unexpected. That is likely to inspire a further collapse in share prices.

But don’t waste a good crisis. In the longer term, this will be the time to look for bargains in future-facing companies. There are 10 trillion reasons we could well get buying before the March lows are touched – unless there is a shocking event, like one of the global banks going down.

Technology stocks are an obvious beneficiary of new investment as we become more digital. Government and corporate investment in pharmaceutical research previously reserved for cancer, heart attacks and the HIV epidemic will be put into viral infections, previously thought to be little more than an irritant.

The global economy can’t allow a shutdown, with a third of the world’s population stuck in purdah, to happen again.
Having a little gold in your back pocket should be a hedge against inflation when money loses value as more of it is printed. Oil stocks may rise from here; surely it has to go up.
The irony of ironies is that Hong Kong is in an excellent financial position to weather the storm, with a mountain of cash going into the crisis and a strong currency (perhaps they are related). It is likely to be one of very few major currency jurisdictions not printing funny money to pay its bills.
Any economy would want to be in our position. Yet, the central and Hong Kong governments seem to have chosen to take advantage of the crisis to favour politics ahead of economics, surely driving a deeper wedge within society and inhibiting our recovery. So even we will be unable to take advantage of good economic management.